120 ans pour le JBM

jeudi 21 avril 2016

A Lesson for Minority Shareholders on the Importance of Shareholders’ Agreements

By Bin ZengGowling WLG

A recent Quebec Superior Court case, Basha v. Singh, 2016 QCCS 1564, illustrates how crucial a shareholders’ agreement can be for minority shareholders. In this case, the plaintiff, Mr. Basha, successfully claimed ownership of 25% of the shares of 7030975 Canada inc. (hereinafter, “Pro Global”). However, his action to force Pro Global to buy back his shares on the basis of an oppression remedy was rejected by the Court. Further, since there was no shareholders’ agreement providing contractual rights on which to ground Mr. Basha’s claim, the Court ruled that Mr. Basha could not demand to be paid for his shares. As a result, he would have to suffer the consequences of a difficult relationship with the other shareholders as well as the downfall of the business.

Context

Mr. Basha, unsatisfied with his employment conditions with Pro Global, resigned from his position as director of Pro Global. He also demanded to be paid by Pro Global, at fair market value, for the shares that he owned in Pro Global, representing 25% of Pro Global’s shares. The other shareholders argued that Mr. Basha had never been a shareholder of Pro Global. More specifically, they claimed that it was agreed that Mr. Basha would not become a shareholder of Pro Global until Pro Global had reimbursed its loans. In response, Mr. Basha filed a motion for an oppression remedy and asked the Court to declare his ownership of 25% of the outstanding shares of Pro Global and to order the defendants to purchase and pay those shares.

It is worth noting that the parties had retained legal services to draft a shareholders’ agreement. However, they did not fully pursue the draft shareholders’ agreement due to a tight business schedule and lack of interest in spending more legal fees.

Analysis and Decision

Based on the evidence, the Court had no difficulty in concluding that it was the parties’ intention that Mr. Basha would become a shareholder of Pro Global immediately upon joining the company. Otherwise, it would have been unlikely that Mr. Basha would have left an advantageous position elsewhere to work for an equivalent salary at Pro Global, a company with lower revenues and an uncertain future. Nor would Mr. Basha have shared contacts and knowledge to drastically increase Pro Global’s sales without being offered the status of shareholder at Pro Global.

The key issue in this case was whether Mr. Basha could force Pro Global to buy back his shares on the basis of an oppression remedy. Before determining the merits of Mr. Basha’s recourse, the Court first reminded us the two-pronged inquiry in considering a claim for oppression:

“[45] […] [68] In summary, the foregoing discussion suggests conducting two related inquiries in a claim for oppression: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest? ” (reference omitted)

The Court further specified that:

“[71] An application for an oppressive remedy under the CBCA is not intended to allow a court to intervene in the matters of a company when the work atmosphere is unfriendly or when the directors or shareholders have different views. The applicant needs to show an unfair prejudice or an unfair disregard to his interests. This implies “a visible departure from the standards of fair dealing and a violation of the conditions of fair play.” (reference omitted)

Mr. Basha argued that the Defendants’ refusal to recognize his status as a shareholder after his resignation constituted oppression. The Court noted, however, that it was Mr. Basha who made the voluntary and unilateral decision to resign from his position with Pro Global, rather than Pro Global wrongfully dismissing him. Indeed, Mr. Basha had become a key element of Pro Global, and his decision to resign took the other shareholders by surprise and put the future of their business in jeopardy. The Court concluded that the fact that the Defendants had refused to recognize his ownership of 25% of Pro Global following his resignation was ill founded in law but understandable in fact.

In the absence of any oppressive acts, a minority shareholder may demand that the corporation buy his or her shares at a fair market value, if a shareholders’ agreement provides for such a right to call for a purchase. However, in the present case, the parties had abandoned their efforts to conclude a shareholders’ agreement. Having found no evidence of oppressive conducts, nor contractual rights to force the purchase by the corporation, the Court ruled that there was no legal or contractual basis on which to grant the relief sought by Mr. Basha and order Pro Global, or the other shareholders, to buy back his shares.

Comments

The Court was aware of the fact that the result of this matter was likely to be unsatisfactory for the parties since they ended up as shareholders of Pro Global with no common desire to operate the business following protracted litigation that affected their relationship. Nonetheless, the Court reserved its power to interfere in the parties’ business in the absence of any oppressive conduct. The Court stated that the issue at hand reflected the problems that any minority shareholder has in a closely held company. In order to prevent the occurrence of such a situation, it is highly recommended to have a shareholders’ agreement in place providing an exit mechanism for minority shareholders.